Nina Röhrbein asks what pressure investors can put on food companies to improve their products and address health issues
The food and beverage sector has always been important to investors because of its risk-return profile. As a defensive sector it is important in protecting investor returns, particularly during economic downturns.
“Although the sector has traditionally been viewed as a steady, slow-growth industry, it is increasingly becoming more dynamic,” says Mirza Baig, director governance and sustainable investment at F&C Investments in India.
“As the sector is fundamentally dependent on consumer demand, companies have to adapt to survive. Within this context, as the importance of nutrition has risen up the agenda of regulators and consumers in western and emerging markets, investors are carefully assessing how food companies are adapting their portfolios and marketing.”
A number of societal trends have affected the food industry and led to a structural shift in consumer behaviour: a global obesity epidemic, an ageing population that wants to keep healthy, and exploding healthcare costs. The obesity epidemic in particular has highlighted the link between diet and health.
Approximately one billion people are overweight, while a similar number are undernourished. This means the food industry carries a double burden - providing access to affordable food while ensuring its products are sufficiently nutritious.
“The supply, demand and access to food are the key factors in addressing this problem,” says Baig. “As investors and regulators of the industry, we need to look at every factor that could materially impact these three areas. Stakeholders need to take a much more holistic approach when trying to tackle this problem so that climate factors are not looked at in isolation from other concerns such as export tariffs and nutrition.”
Through their marketing and labelling practices, food and beverage manufacturers play a role in shaping the nutritional environment. “When you take that view, any food and beverage company can do something positive to improve nutrition, whether it is reformulating their products to offer consumers healthier choices or educating them on their purchases,” says Chris Walker, project lead for the Access to Nutrition Index (ATNI) at the Global Alliance for Improved Nutrition (GAIN). “Stakeholders are increasingly pointing the finger at companies for problems linked to malnutrition. However, investors can also be part of the solution by making an investment case for nutrition and reducing the risks associated with investments in companies making less healthy food, which may be exposed to stricter regulation, litigation, reputational damage and taxes aimed at reducing consumption of such products.”
And Baig adds: “In the past, unhealthy food was cheap to produce. But with the change in regulatory environment, consumer taste and awareness, companies that have continued to provide high-fat, high-sugar staples are beginning to see demand for their products slow.”
Increasing exposure to nutrition can also lead to revenue opportunities, as even in a difficult environment consumers have demonstrated a willingness to pay for healthier foods. Attractive categories include organic and natural food, healthier food products, weight-control food products, and fortified or functional food products.
“We expect growth in the health and wellness categories to outpace the broader food market,” adds Diederik Basch, senior equity analyst covering food and beverage at asset manager SAM. “Companies that have a health and nutrition strategy and help provide solutions should see strong growth rates.”
Companies are already changing some of their existing products to make them healthier by reducing the salt and sugar content and increasing the fibre and protein content. There is also very strong growth in condition-specific foods, such as low-glycemic or gluten-free.
Because they can allocate vast sums of money to R&D, it is the companies with the largest balance sheets that set the standard for the rest of the industry.
“If you look at Nestlé, Danone, Unilever and a few other large-cap companies, their R&D centres are now more akin to pharmaceutical companies in how they look at nutrition, and they have been critical in moving consumer tastes,” says Baig. “Instead of, for example, halving sugar in one go, they do this gradually over a three to five-year cycle to take the consumers with them. However, although these companies dominate, they do not represent the industry as a whole, which is why investors need to encourage the mid-cap players within European and US markets to follow the lead of their large-cap counterparts. This is the area where there is much more work to be done, as these second-tier companies do not have easy access to the capital required to move away from unhealthier product categories or improve the nutritional profile of their existing products.”
F&C is balancing one-to-one engagement with collective engagement with likeminded investors to address these issues. Often, companies that have already made progress in the area react positively to engagement, while those that have not are less welcoming.
For its company ranking, the Swiss private bank Sarasin relies on public information from the company as well as engagement. “By visiting companies we get an insight into company culture,” says Gabriella Ries, senior sustainability analyst at Sarasin. “In addition, we are in touch with independent organisations such as NGOs to see how they assess the company and evaluate its products.”
One of the biggest challenges for companies is dealing with the double burden of obesity and undernourishment in markets such as India, Malaysia, Mexico and the Philippines. The ATNI - due to be launched by the end of this year - is meant to address this. Three indices will focus on the double-burden countries of Mexico, South Africa and India, while the core index will rank 25 companies based on their global operations.
To deal with the double burden, companies need to have two strategies: one strategy to reduce the harmful contents of their products; the other a nutrition-enrichment strategy based on what nutritional elements are missing in a population.
Of course, health and nutrition is not the only issue in the food industry. Food scarcity - which contributed to the uprisings in North Africa and the Middle East - is linked to the decline in crop yields, the lack of arable land, climate change and water stress. Other issues are food safety, carbon emissions, biodiversity, the sourcing of raw materials, supply-chain labour and the growing demand for animal feeds and biofuels.
“Food scarcity and the fact that in some areas people suffer from hunger is more of a political problem than something that companies can do much about,” says Ries. “But on the issue of health the industry has a clear responsibility.”
However, improving the nutritional intake of consumers is not down to companies alone. Both obesity and undernourishment must be addressed by a national health policy and regulatory framework.
“It is a governments responsibility to regulate the market, make sure that consumers have the opportunity to make informed decisions and that the more vulnerable elements of society, particularly children and low-income families, are not unduly exploited,” says Baig.
“This can be done through initiatives that have already taken place, such as banning snack food in school environments and restricting advertising at certain periods of the day. However, it is important that the regulatory framework and corporate approach are based on the provision of a mix of foods with the ultimate decision on diet resting with consumers. The focus should be on helping consumers construct a healthy balanced diet rather than banning individual food types.”
In the end, investors are conscious of industry dynamics and consumer trends but will continue to invest in high-fat, high-sugar products if they see growth opportunities.